Volatility in the UK Pound to Norwegian Krone (GBP/NOK) exchange rates picked up markedly as Thursday's session progressed with markets reacting to the latest round of monetary policy decisions from Norges Bank and digesting an OECD report which suggested that global growth could be on track for its weakest performance since the global financial crisis while no-deal Brexit risks could push the UK economy into recession.

After trading flat overnight and into Thursday's session, the Sterling to Krone exchange rate plunged on the back of the latest Nogres Bank policy steps before rebounding to flat only to plunge again following the OECD report. At the time of writing, Sterling was last seen trading at NOK 11.13678, down a modest 0.18%.

Norges Bank Hike But Signal Prolonged Pause From Here

Norwegian Krone volatility spiked around the Norges Bank policy releases on Thursday with the NOK first gaining rapidly on the decision to hike the key policy rate to 1.5% before reversing gains (and more in some cases) almost as rapidly. Forward projections for Norwegian interest rates were lowered, however some analysts still see the potential for at least one more hike in the year ahead.

"The Norges Bank has cemented its position as the clear outlier in the global central banking arena, having decided to hike interest rates for the third time in 2019 at today's meeting," wrote ING economists.

The last hawks left standing earned their title on Thursday with Norges Bank bucking the global trend towards lower interest rates and higher easing. Heading into the releases there were widely mixed expectations, particularly given the growing camp of developed market rate-cutters. However, in line with consensus, the key rate was lifted to 1.5% while the terminal rate was lowered somewhat.

Forward projections of the rates path now put the highest point at around 1.60% in Q4 2020, suggesting their could be room for a modest hike ahead while the terminal point was lowered to 1.53% (in 2022).

The lower rate path reflects a bleaker outlook for economic growth and lower interest rates among peer markets alongside "high uncertainty connected to international developments," according to Nordea analysts.

"Norges Bank's new rate path (which is little-changed versus the June edition) signals that this year's tightening cycle has probably run its course for now. The bank's press statement points to a number of uncertainties - Brexit, trade wars and geopolitical tensions in the Middle East - as reasons for caution," wrote ING developed markets economist James Smith who added that a 2020 US-China trade-war resolution and benign Brexit outcome would likely pave the way for another rate hike next.

For the NOK, Norges Bank expect the the Krone to weaken moving forward although gains should be in store against the single currency according to their latest projections which were generally in alignment with Nordea's latest forecasts for Krone exchange rates.

OECD Forecast UK Recession, 5% Losses for GBP on No-Deal Brexit

Sterling traded relatively steadily in early trade, taking Thursday retail sales release on the chin, before falling sharply versus peer currencies on the back of fresh warnings that the UK economy could be barrelling head-first towards a Brexit-induced recession.

According to the Office for National Statistics, the value of sales at the retail level fell by 0.2% in August, although from a three-monthly perspective, retail sales grew by 0.6% (which should equate to around a 0.03% positive contribution to GDP).

In line with the weak CPI reading earlier in the week, Tom Leman, head of retail & consumer at Pinsent Masons, argues that too many retailers are still playing ‘catch-up’, holding off on price increases amid Brexit uncertainty.

Leman went on to say that "Whilst monthly stats are a useful indicator of the market they do not tell the full story. The challenging global political environment makes it difficult to make too many assumptions, from these figures, about the health of the retail sector. The threat of a no-deal Brexit makes it almost impossible to predict retail sales and consumer spending in September and October."

Despite the negative headline (monthly) print, Sterling gained post release although upside turned out to be short-lived with a fresh report from the Organisation for Economics Cooperation and Development painting a bleak picture of post-Brexit UK. According to the report, no-deal Brexit could cut 3% off of UK GDP growth and would likely plunge the UK economy into a recession while wiping 5% off of Sterling exchange rates.

"Today’s report estimates that losing unfettered access to EU markets after 31 October will likely plunge the UK into a recession next year. The loss of trade, investment and technical knowledge plus a further fall in the pound will prolong Britain’s low rate of growth until at least 2022," wrote the Guardian's Philip Inman.

Given a no-deal outcome would sorely impact the UK economy, the OECD's chief economist Laurence Boone outlined the obvious way to avoid such damage "is to avoid a no-deal Brexit and to stay closely aligned to the EU as possible,” while stating that policymakers could move to insulate the economy from the no-deal Brexit shock by cutting interest rates and upping easing while the UK government could also add fiscal stimulus should the worst case scenario come to fruition.

Responding to the report, Labour’s Shadow Chancellor John McDonnell wrote "This report is a clear and stark warning of what we face if Johnson takes this country over the cliff edge of no deal Brexit. It confirms the absolute necessity of preventing this needless threat to our economy.”

Despite the warnings, Bank of England policymakers are widely expected to stand pat on UK interest rates on Thursday. While the MPC have retained policy wording to suggest higher UK interest rates, recent comments have indicated that rates could go higher or lower with the direction largely dependent on how Brexit unfolds.

"Today’s UK Monetary Policy Committee meeting should portray a Bank of England with a bias to hike should conditions allow it. They don’t," wrote ING global head of strategy, Chris Turner, adding "Hard Brexit risks mean that neither sterling nor UK rates will get much of a lift today."

Beyond Thursday, investor focus is likely to remain on Brexit-related politicking: in particular the outcome of the Supreme Court hearings on PM Johnson's proroguing of parliament as well as any signs of progress or a lack thereof from continued UK-EU negotiations.

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Elaine Housten

After graduating with a 1st in psychology (BSc Hons), Elaine specialised in the areas of trader psychology...